Wednesday, January 13, 2010

Foreclosure Process

Sign Of The Times - ForeclosureImage by respres via Flickr
Foreclosure can be caused by a variety of reasons, from emotional problems (depression and grief, leading to disengagement from the world) to outright financial difficulties, or even a combination, such as divorce, or even fraud. There are a variety of options, but the first thing you need to do is acknowledge the problem. After all, you cannot solve the problem if you don't even acknowledge that the problem exists! Of course, you have to LEARN about the problem first.

There have been many cases where one member of the two-person household is in charge of all finances, and the other person does NOTHING. As Reagan said before, "Trust, but verify." You may trust your partner that he or she will do the right thing, but there have been many cases where the other is either too busy to even realize there was a problem, or too ashamed to admit that there was a problem. There were plenty of anecdotes that the owner of the house didn't even know that his house had been foreclosed on, and SOLD OFF in a sheriff's auction on the courthouse steps. He only knew when a real estate professional came to his door to inform him. He had entrusted all financial stuff to his wife, and when his wife failed to send payments, he knew nothing.

The earlier you know about the problem, the better your chances of avoiding foreclosure altogether, because foreclosure is a long process, and there are many things you can do to "buy time".

There are SIX stages to the foreclosure process, though the length of each stage may vary from state to state depending on local laws. The six stages are: pre-foreclosure, foreclosure notice, reinstatement period, auction/sale, redemption period, and finally eviction.

Technically, there is a "stage 0", where everything is "normal". However, if you know you will not be able to pay the next payment, it is time to seek for help, rather than actually wait until stage 1.

STAGE 1: Pre-foreclosure is the first stage in the foreclosure process. Basically, it starts when you are late in paying your monthly mortgage payments. Mortgage companies know that you *could* accidentally forgot to pay or pay late, so you will get written notices and/or calls. DO NOT IGNORE THEM. Pay up and nothing will happen except for a "late payment" entry in your credit report. If you missed payments for SEVERAL months, then you proceed to the next stage. Lenders may or may not publish this information.

STAGE 2: Foreclosure notice, the second stage of the process, is where you get a formal letter that your house is being foreclosed on. There will also be a formal notice of foreclosure posted in your local paper's classifieds, and perhaps, even notices posted at or near your property's location. An auction date/time is given. Once you get the actual notice of foreclosure, you have a deadline after which the property is no longer yours, unless you buy time with delaying tactics. This is public information, so be prepared to be solicited by various "rescue organizations", scammers, investors, and even a few genuine helpers.

STAGE 3: Reinstatement period, may or may not exist depending on your local jurisdiction. Basically, it gives you a chance to get the loan reinstated (i.e. foreclosure cancelled) if you pay all the late payments plus penalties, fees, and so on. If you can't, you go onto next stage. You should get reinstated as much as possible, as you just have to catch up on payments and penalties. HOWEVER, you CANNOT just send in the missing payments as the lender will not accept it. Instead, you will have to talk to their rep and specifically pay the reinstatement cost and penalties and such.

STAGE 4: Fourth stage is the actual auction or sale of your property by the sheriff on local courthouse steps. An investor will likely buy it for less than market value. If nobody bids, then the lender gets the title back and property becomes REO (by lender). The sale / auction usually happens once a month though it can be more or less often depending on the jurisfiction, the number of properties that needed to be sold, and so on.

STAGE 5: Redemption period is the fifth stage, where you still have one more chance left to buy back the property from the buyer at the sale/auction (or the lender, if it ended up back with them), plus various fees. Basically, you have to pay the ENTIRE MORTGAGE to keep the house. It starts right after the sale. Exact procedure will vary by jurisdiction. Keep in mind that redemption period can as short as 15 minutes, and some states don't even have redemption periods, so don't rely on this to keep you in your house. On the other hand, some states allow up to a year in redemption period, giving you a lot of time to do something else.

STAGE 6: The final stage of foreclosure is the eviction, where agent of the new owner, along with law enforcement officer(s), come toss you out along with all your belongings, if you haven't moved out already.

There are defensive strategies you can employ at all stages except eviction, depending upon your circumstances and intentions. Your options essentially falls into three categories:

* save the house -- if you have a lot of equity and your finances will recover, then temporary borrowing and some belt-tightening should get you through this period. The earlier you act, the less you have to borrow. At stage 1, you just need to borrow a payment or two's worth. At stage 3 you need to borrow all missing payments PLUS penalties and fees. At stage 5 you need to borrow the entire remaining amount of the loan plus penalties and fees!

* sell the house -- most people who were laid off need to trade-down to a smaller house that they CAN afford payment on, so the original house need to be sold. You are under time pressure, so you should hire an good agent to sell it in the least amount of time. Even if the house don't really sell, you can use that and the information developed (such as the amounts offered) to help you make a case to the lender to accept one of the alternatives, such as short sale, where the bank accepts amount LESS than amount owed as "full payment". This can be done all the way up to the end of redemption period. If you are older (say, 60's) and you have a lot of equity in your house, you can do a reserve mortgage, where you live off your equity in the house.

* give up the house -- if your house really can't be sold, then the goal becomes damage control, as you need to limit the damage to your credit and finances. There are a few options remaining. One of them is deed back. Basically, you just ask the bank of they will simply take the house back, and you give up ALL your equity in the house. If you don't have much equity in there, and the house is in a relatively hot market, the bank may accept it, but you will need to show that you have at least TRIED to sell at a reasonable price, and gotten no offers. As a final option, you can declare bankruptcy and liquidate all your assets, and tell everybody, that you have no money left, so stop coming after me. You will lose the house, but that's a given.

So what should you do? That depends on the amount of time available, resources available, and what are your ultimate intentions (keep, sell, or give up?)  But you can't decide until you have all the stuff and evaluated all the options. There are no miracle cures.

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